It has been several years since the commencement of the application of the Law on Arbitration in Serbia. Before the Law was adopted (which has been in force since June 2006) the regulatory rules concerning international arbitration were drawn from other domestic laws (mainly in the International Private Law and Law on Litigation Procedure) and were unsatisfactory.
Comprehensive legislation was introduced with the intention of accelerating the resolution of commercial disputes and in an attempt to contribute to the stability and certainty of the commercial market for foreign investors in Serbia.
As a contribution to the global unification of the rules relating to international commercial arbitration, the Law incorporated the rules of the United Nations Commission on International Trade Law (UNCITRAL) model, providing, in this manner, the harmonisation of international business on one side and the legal framework on the other. Accordingly, Serbia has formed a solid base for the creation of a legal environment that creates an environment of trust for all parties participating in international arbitration.
With regard to international arbitration in Serbia, it is important to mention that Serbia is one of the contractual parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Accordingly, foreign international arbitral awards may be enforced in Serbia.
Once such a decision is recognised by a Serbian court, a foreign arbitral award is deemed to be a valid ground for the initiation of an enforcement procedure. However, one notable caveat is that the procedure for the annulment of an arbitral award could potentially be appealed, and extraordinary legal remedy allowed, and this process lasts for years. Accordingly, this may well influence the procedure relating to the enforcement of arbitral awards.
In the course of our practice we have recognised that in recent years, international arbitration has grown to be an important alternative in the resolution of international commercial disputes in Serbia. The justice system in Serbia is undergoing major reforms. This includes the re-election of its judges, the restructuring of its courts and numerous changes to its procedural rules.
Even though the intention of those reforms is to speed up the proceedings before the courts and to make the courts more efficient, at this point in time, due to the transition period, the courts in Serbia are almost at a standstill.
These circumstances make arbitration a more desirable way of resolving disputes. The other factor influencing the increase in the number of arbitrations (in situations where an arbitral option has already been agreed between contracting parties), is the fact that more and more companies are experiencing financial difficulties due to the world economic crisis.
Such companies are not in a position to easily reach an out-of-court settlement, as was the case in previous years. Accordingly, they leave the opposite side with one last option – the option of initiating the arbitration procedure. On the other side, it is not uncommon to find that a financially weak side, even with the stronger arguments, might not be in a position to generate the means necessary to initiate the arbitration process, and accordingly this could leave this party with its rights unprotected.
Today, companies carefully analyse their exposure of arbitration costs, including the arbitration and attorneys’ fees, (which are to be paid upfront), and compare them with the value of the dispute. The result of this is that arbitrations are usually only initiated in the event of high-value disputes, whereas minor claims are generally not brought before the arbitration process at all.
Commercial arbitration aside, where both sides are companies, in our practice we are finding that an increasing amount of arbitration cases are arising from the privatisation of companies and businesses. Privatisation in Serbia began in 2000 (after the political changes on 5 October 2000) and the process is presently in its final stages.
The aim of the privatization of state companies and industries was to sell publicly and socially owned assets. This resulted in the vast majority of companies in Serbia becoming privately owned. The mandatory contractual party in the privatisation proceedings is the Serbian Privatization Agency. This is the state body liable for the carrying out of the obligations stipulated in the privatisation agreement.
In cases when the investor-buyer is a foreign entity it has been common practice to stipulate a specific jurisdiction in the event of international arbitration, where disputes arise from privatization contracts. In this way it is insured that the Privatization Agency and the investor-buyer will participate in the proceedings before a neutral forum.
With its strategic geographic location, low operating costs and investment incentives, Serbia has become a desirable country for investments. Popular areas are concession-related investments such as the above-mentioned state privatizations. Where an investor in such a privatisation is a foreign entity, international arbitration is regularly stipulated in the privatisation agreement.
At present, there are several ongoing disputes resulting from such privatisation agreements. Considering all the above, we are of the opinion that there will be an increase in the volume of international arbitrations emanating from the Serbian legal jurisdiction.